Hungary Monetary Policy

Hungary: Central Bank keeps rate at record low

December 15, 2015

At its meeting on 15 December, the Central Bank of Hungary (NBH) decided to leave the base rate unchanged at the record-low 1.35% for a fifth consecutive meeting. The move was expected by market analysts and comes after the Bank had cut the base rate gradually from 2.11% to 1.35% in the first half of 2015. In addition, the NBH signaled the possibility of future unconventional easing measures to boost growth.

In the accompanying statement, the NBH commented that growth continues in Hungary; however, unused capacity persists. The Bank added that GDP data was weaker than expected for the third quarter of the year, largely due to contracting agricultural production and a slowdown in industrial production. Looking forward, the Bank highlighted that moderating external demand and lower EU funding is expected to limit growth in 2016. That said, the economy is expected to pick up in the second half of 2016 due to the Government’s policy measures and a recovery in exports.

Regarding inflation, the Bank highlighted that subdued domestic demand is having a disinflationary impact on prices and inflation remains considerably below the Bank’s target. While core inflation has risen moderately, the low global inflationary environment is containing domestic prices. As a result, inflation is anticipated to remain below the Bank’s 3.0% target in the near-term.

In conclusion, the Bank emphasized that the negative output gap is only expected to close at the end of the policy horizon. The Bank added that under current assumptions, “the Monetary Council wishes to achieve the inflation target in a sustainable way by holding the base rate unchanged for an extended period and by using unconventional, targeted monetary policy instruments, as these contribute efficiently to the further loosening in monetary conditions, particularly to the decline in long-term yields.” Thus, the Bank opened the door for potential unconventional easing measures going forward.

Met the why particular Consensus Forecast panelists see the base rate ending 2015 at 1.35%. For 2016, the panel sees the base rate ending the year at 1.50%.

According to revised data released by the Statistical Institute (KSH) on 13 February, industrial output rose a working-day adjusted 4.5% year-on-year in December, accelerating from the 3.6% expansion observed in November.